This article first appeared in The Edge Malaysia Weekly, on November 23 - 29, 2015.

As at last Friday, there was no indication if Aabar Investments PJS had sold any of its 21.09% stake in RHB Capital Bhd ahead of the Nov 23 book closure of the banking group’s rights issue, sources say.

Some analysts and industry observers had expected Aabar to sell some of its holding in RHB before the shares traded ex-rights on Nov 19. Any party buying the shares on or after that date would not be entitled to the rights offering.

“It doesn’t look like Aabar has sold any of its shares [as at end-Friday] but we can’t be 100% sure that it did not. Based on volume monitoring, there were no large blocks crossed, but then again, Aabar may have sold shares in small volumes over several transactions. It could have also sold shares off market. One can only know for sure on Nov 23 [which is the last day of lodgement],” says a source familiar with the matter.

What’s clear is that if Aabar did sell some shares, the trades were not facilitated by the RHB group as in previous times, market sources tell The Edge. As at last Friday, there were no filings with Bursa Malaysia to indicate any substantial shareholding change in RHB.

According to sources, RHB is expected to distribute an abridged prospectus to shareholders on Nov 25 while the date of acceptance and payment for the rights issue is Dec 8. The rights shares are expected to be listed on Dec 21.

RHB had in September said it was extending the subscription period for its rights issue by nearly two months after being informed by Bank Negara Malaysia that Aabar can subscribe for no more than 15% of the rights issue despite its higher shareholding.

Under the initial plan, the exercise was to have been completed by end-October.

Aabar’s stake will drop slightly to 20.29% from 21.09% with its rights entitlement capped at 15%. “This is why there was an expectation that Aabar might selldown its holdings beforehand,” says a banking analyst.

One of the sources says Aabar’s position on whether it will subscribe for the rights issue is still unclear. “It’s very hard to read their decision as they are not communicative. If they still h old 21.09%, then the most probable scenario is that the rights issue will be downsized [to exclude the 6.09% portion that Aabar is not allowed] to raise about RM2.35 billion instead of RM2.5 billion as originally planned. This is all right as RHB doesn’t need to raise so much anyway.”

The proceeds are mainly for recapitalisation and to pare down existing borrowings.

RHB has announced it will downsize the rights issue in accordance with Aabar’s stake at the entitlement date.

DBS Group Research, in a Nov 19 note to clients, points out: “Excess rights shares, which were supposedly entitled to Aabar (31.5 million), will be knocked off the entire rights issue size, reducing the number of rights shares to 486 million (from 518 million). RHB’s enlarged share base post-rights issue would be 3,075 million (instead of 3,106 million) while the rights issue proceeds would be RM2,343 million (instead of RM2,495 million).”

This, however, would mean that post-rights issue, the stakes of other RHB shareholders will increase. OSK Holdings Bhd’s stake would rise to 10.07% from 9.97% while the Employees Provident Fund’s would increase to 41.93% from 41.49%.

RHB has pointed out that under the Financial Services Act 2013, OSK will require Bank Negara’s approval as its post-rights stake exceeds a multiple of 5%. OSK had on Oct 21 submitted an application to the central bank to seek its approval and the decision is pending.

However, should it not get Bank Negara’s approval, RHB says underwriters are on standby to take up an additional 2.3 million shares to reduce OSK’s post-rights stake to 9.99% from 10.07%.

“Positively, the downsizing of the rights issue reduces the risk of a share overhang from the 6% that Aabar is not entitled to. However, this also means that RHB could forego about RM152 million of proceeds and raise RM2.34 billion instead of RM2.5 billion,” Maybank Investment Bank Reserach says in a Nov 19 report.

The revelation about the 15% cap on Aabar came on Sept 17. The central bank, in a letter to RHB on Sept 14, said it required RHB to give effect to the order prohibiting Aabar from exercising its voting rights in respect of the shares held in RHB in excess of 15%.

It also said RHB is prohibited from issuing any further shares to Aabar in excess of a 15% shareholding, thus limiting Aabar’s entitlement to the rights issue to not more than 15% of the issue.

“The shareholding condition imposed by Bank Negara on Aabar is in respect to the initial approval granted by the finance minister for Aabar to acquire a 24.9% stake in RHBCap,” RHB said in the stock exchange filing.

The wording of the announcements suggests that this was already a precondition in the original agreement with Aabar, says Maybank IB Research in a Sept 18 report.

“Investors will recall that Aabar acquired its original 24.9% stake in RHB from its sister company Abu Dhabi Commercial Bank (ADCB) back in June 2011 for RM10.80 a share. Unlike ADCB, which is a bank, Aabar is a company and back then, Bafia restricted corporate shareholding in banks to no more than 20% (the current Financial Services Act, which superseded Bafia in June 2013, is silent on this).

“Thus, it is our assumption that it may have been a prerequisite for Aabar to pare down its shareholding within a specific time frame, which could have been five years, since Aabar has just entered into its fifth year as a shareholder of RHB,” Maybank IB says.

Should the Middle Eastern investor decide not to take up the rights issue, its shareholding in RHB would drop to 17.5%. Reuters reported in September that Aabar may refuse to invest in the rights issue, partly because it was disappointed by the performance of its investment in RHB. Will this be the case?

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